Public Bill Committee

[Sir Nicholas Winterton in the Chair]

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

Nicholas Winterton: I welcome members to what we expect will be the last day of sittings of the Finance Bill Committee 2008. I know we are going to make good progress. That has come down to me through the usual channels. I feel we have come around Tattenham corner. We have gone up the rise and we can see the finishing post ahead of us. I remind the Committee that we are debating—

Philip Hammond: rose—

Nicholas Winterton: Does the hon. Gentleman wish to make a point of order?

Philip Hammond: On a point of order, Sir Nicholas, it could be a few furlongs yet.

Nicholas Winterton: Indeed, I forget exactly how long the straight is at the Derby, but—

Peter Viggers: I am really shocked that Tory knights of the shires should not use an Ascot reference on ladies day.

Nicholas Winterton: Historically, I have been a guest of a particular company on ladies day, but today I am doing my duty here in the Palace of Westminster.

Clause 22

Periods of Residence

Amendment proposed,[17 June]: No. 360, clause 22, page 12, line 40, at end add—
‘(9) The Treasury shall lay before the House of Commons by 31 December 2008 a report setting out the basis of a statutory residence rule to replace the existing rules.’—[Mr. Hoban.]

Question again proposed, That the amendment be made.

Nicholas Winterton: With this it will be convenient to discuss the following: clause stand part.
New clause 5—Definition of residence
‘(1) An individual is resident in the United Kingdom for income tax purposes if—
(a) during the tax year in question the individual spends (in total) more than 31 days in the United Kingdom; and
(b) during the three-year period that includes the tax year in question and the two tax years immediately preceding it the individual has spent (in total) 183 or more days in the United Kingdom, including—
(i) the total number of days spent in the United Kingdom in the tax year in question,
(ii) one-third of the days in the tax year immediately preceding the tax year referred to in sub-paragraph (i), and
(iii) one-sixth of the days in the tax year immediately preceding the tax year referred to in sub-paragraph (ii).
(2) An individual found to be resident under subsection (1) shall be liable for income tax on both their UK income and capital gains and any foreign income and capital gains remitted to the United Kingdom.
(3) In determining whether an individual fulfils the definition of residence under subsection (1) treat each day the individual is physically present in the United Kingdom as a day spent by the individual in the United Kingdom.
(4) But in determining that issue do not treat as a day spent by the individual in the United Kingdom any day on which the individual—
(a) arrives in and departs from the United Kingdom on the same day;
(b) is present in the United Kingdom for less than 24 hours for transit only;
(c) is present in the United Kingdom by virtue of being employed as a crew member of a foreign vessel;
(d) is unable to leave the United Kingdom on the same day owing to a medical condition;
(e) is enrolled in full-time higher education in the United Kingdom;
(f) is an exempt individual.
(5) The Treasury shall, by regulations, define an exempt individual.
(6) Regulations under subsection (5) shall be made by statutory instrument.
(7) A statutory instrument containing regulations under subsection (5) may not be made unless a draft of it has been laid before and approved by resolution of the House of Commons.
(8) On the coming into force of this section, Chapter 2 of ITA 2007 shall cease to have effect.’.

Jeremy Browne: Good morning, Sir Nicholas. I would like to go straight to new clause 5, which is in my name and that of my hon. Friends. The purpose of the new clause is to introduce a statutory definition of residence into the Bill and into British law as a whole. The explanatory notes concede that the concept of residence, which is central to determining the liability of an individual to UK tax, is
“only dealt with in a limited way in statute.”
The approach of Her Majesty’s Revenue and Customs to residence is a mixture of legislation, case law and guidance dating back to the 1950s, so it is drawing on a range of sources to try to establish what constitutes residence in any given case. A number of professional bodies and others, including PricewaterhouseCoopers, have drawn attention to that situation and expressed their concerns that a hotchpotch of legislation, case law, guidance and established practice, some of which has a firm legal basis and some of which is for the purposes of guidance only, constitutes an unsatisfactory basis on which to determine these matters.
That is the background, and my understanding is that the Government are sympathetic to that case, as is the Conservative party and others. Therefore, I hope that I am introducing a brief conversation which will find a lot of sympathy in all parts of the Committee. New clause 5 would introduce the test, and I will briefly take the Committee through it. It is based on the American residence test. There is also an Irish test that is regarded by many as a good basis on which to draw up a test for our country, but the new clause is based on the American test, and the tests are all variants on a theme in any case.
The test would establish who is liable for income tax on their UK income and capital gains, and on any foreign income and capital gains remitted in the United Kingdom. There is a list in the new clause, which draws up a basis on which these matters could be measured. I concede that it is a slightly complicated list, but it is necessary to have a degree of complication in order to try to make the system as fair as possible. However, it is not beyond the wit of members of the Committee or, for that matter, employees of HMRC, to use that as a basis on which to determine one way or the other whether somebody is a resident for tax purposes or otherwise.
I have added to the American test a few other features that are unique to these proposals. One of those features, which I touched on during our discussions on Tuesday, is an exemption for those enrolling in full-time higher education in the UK—students would be a better way of describing them. I know that the Committee rejected that proposal on Tuesday, which might be a barrier to some Members supporting it now, but that was to be consistent with my previous amendments.
There is also a provision that would allow the Treasury to define by regulation what “an exempt individual” means. In the United States, exempt individuals include foreign Government workers, professional athletes and students and teachers on certain categories of visas. We might wish to introduce some exemptions of that sort in the UK to ensure that no one falls foul of the regulations in a way that would be difficult for the Committee to envisage. That is the basis of what I am trying to achieve in the new clause.
I say without immodesty that there appears to be considerable support for the proposal outside the House. John Barnett, the chairman of the Chartered Institute of Taxation’s capital gains tax and investment income sub-committee, said:
“We welcome the Liberal Democrats’ contribution to this debate as it is a very important issue that needs to be discussed. While the Government has stated that it does not wish to make any more changes to the non-domicile rules, the CIOT feels that a statutory residence test would bring certainty to this complex area. If done with sufficient consultation it need not result in unexpected or adverse consequences. And it will be popular with the business community because it will avoid the current ambiguities that are not helpful either to HM Revenue & Customs or to taxpayers.”
John Whiting, the distinguished employee at PricewaterhouseCoopers, said:
“Including a wider statutory framework for deciding residence, in this or a later Finance Bill would give greater certainty to taxpayers and employers.”
That is what I am seeking to achieve. I have been told that the professional bodies believe that the Government are open to creating such a definition. After other Members have contributed to the debate, it would be extremely helpful to hear whether the Financial Secretary might accommodate the new clause or give an undertaking that the Government will consider bringing forward a similar clause in a future Finance Bill.

Jane Kennedy: Welcome, Sir Nicholas. I fully appreciate the sacrifice that you have made to be present. We value your chairmanship and are grateful to see that you are here, rather than somewhere else that might have appeared more attractive on the surface.
As has been explained, the UK does not have a statutory residence test. Rather, our system operates through a mixture of statute, case law and guidance. I am aware that a number of representative bodies have argued the case for a statutory residence test for tax purposes. I have met a number of those organisations, and having listened to their representations, it is clear that there is currently no agreement on what form a statutory residence test should take. I have asked officials to consider the representations that have been made and to work with those groups to see whether consensus can be reached on what the best test would be for the UK environment, bearing in mind that our circumstances are different from those of other economies in which those tests already exist. However, I am not prepared to allow the whole debate about residence, non-domiciles and the remittance basis to be opened up, because that is not in the UK’s interests.
One of the criticisms that I accept as fair is that the current debate has caused a degree of uncertainty. I have some sympathy for the case that a statutory residence test would enable taxpayers to decide whether to use the remittance basis or another basis on which to pay tax. Ours is a complicated system, so having a simpler rule applied would be a benefit. However, I would like to see a lot of work done before we commit to a particular style of test. Therefore, I am encouraging the very good and productive work that the four main organisations making the point are undertaking. I am hopeful that that will bear fruit. At this stage, I cannot set a time for that, but I am sure that, with good will, those organisations can agree on what might be best, and we can take that forward to a proper consultation. I am prepared to do that only if it will not change the policy that we are discussing this morning fundamentally; it remains the settled view of the Government in terms of the detail of how the system will impact.

Mark Hoban: The Financial Secretary is making important points about the debate. I understand that the representative bodies could work quickly towards reaching a view among themselves about what an appropriate test might be. If the consultation were to be part of the 2008 pre-Budget report, by when should the representative bodies come together and produce a workable definition, which they could pass to the Treasury and HMRC?

Jane Kennedy: Those bodies would need to be very swift indeed. We would want to research a suggested model carefully, so that the Treasury and HMRC could thoroughly understand what the economic impact of any such model might be before we brought it forward through the PBR for consultation. There is no point of party principle or difference here. We are interested in setting the debate for the future so that non-domiciled UK residents, who seek to use the remittance basis for tax purposes, can be assured that we not only appreciate the value that they bring to the economy, but want them to continue to make the UK their home and to continue contributing to the British economy in the significant way that we know they do already.
The hon. Member for Fareham asked me to elaborate on how the Treasury arrived at its figures. The figures that he drew upon came from the document that we published in December, “Paying a fairer share: a consultation on residence and domicile”. I could elaborate at length, but I do not think that it would be of great value to the Committee. There is not a lot more that I can add to the figures. They were based upon estimates of people who were considered as needing to use the day-counting rules—air crew and others who would have to count the number of days that they were resident in the UK. It is true that to some degree they were estimates, but they were the best estimates based on the figures that we had. It would not necessarily be helpful to the Committee to enter into a vague debate about those figures.
Based upon the representations that I have heard this morning, and on Tuesday evening, the principle being pressed is that we should consider a statutory residence test. I have said that I am open to those representations and I think that it would be best to leave it at that for now. I hope that the hon. Members for Taunton and for Fareham will accept that the specific example of a residence test, which the hon. Member for Taunton has put forward, is a little premature for us to accept. Equally, it is not necessary for us to be required to lay a report in the way that the hon. Member for Fareham has suggested. I have made it clear that I will use my good offices to do so when we have arrived at consensus. I know that the Chancellor does not like issues such as this to remain unsettled, so it would be better if we could see what consensus can be arrived at quickly, and move forward on that basis.

Jeremy Browne: That was a helpful speech from the Financial Secretary. I have some sympathy with her Treasury Ministers, and Ministers in any Department for that matter: if they consult widely, they are criticised for not moving with sufficient haste, and if they fail to consult widely, they are told that they are not listening sufficiently to representations. I hope that the Treasury can strike a balance between those two positions and, as the Financial Secretary says, take on board a lot of the comments that have been made by outside bodies. Such comments are made with the good intention of having a system that is easier for them and all citizens to understand, whether they be UK residents or those who come here only periodically.
I did not anticipate the Financial Secretary accepting the new clause, and I acknowledge that a new clause drawn up by me and my hon. Friends, albeit with the assistance of people in professional bodies, is unlikely to be introduced off the peg by the Government. However, I hope that it will at least provide a kick-start to a helpful process. I do not know what the procedure is for new clauses, but I would not wish the Committee to be detained any longer.

Nicholas Winterton: You merely resume your seat in this case.

Mark Hoban: I want to make two comments. I welcome the Financial Secretary’s remarks. She has indicated an openness to the debate on the need for a statutory residence test, and has sent a clear signal to the representative bodies that we need to work quickly. I am sure that they will take note and respond to that signal, so that the debate can be moved forward as quickly as possible. That is in everybody’s interest. The Financial Secretary has dealt with the statutory residence test, but not with the questions I raised on Tuesday evening about when we will see a revised IR20, and what guidance will be produced on in-transit rules. She did deal with the issue of cost. I would be grateful if she could respond now.

Jane Kennedy: If the hon. Gentleman will forgive me, I had an answer for him on Tuesday afternoon but I have now mislaid that. I have found it. I beg the Committee’s pardon.
Once the Bill is passed, HMRC will publish a revised IR20. That will, however, be temporary, as HMRC is rewriting all the guidance covering residence and domicile, which will include the 2008 Budget changes. It will be appropriate to wait until those changes have been made before the guidance is completely rewritten. The new guidance will be subject to consultation, following Royal Assent.

Mark Hoban: I am grateful for that clarification, and also that there will be consultation. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 22 ordered to stand part of the Bill.

Clause 23 ordered to stand part of the Bill.

Schedule 7

Remittance basis

Jane Kennedy: I beg to move amendment No. 339, in schedule 7, page 151, leave out lines 20 to 28 and insert—
‘(3) Sections 42 and 43 of TMA 1970 (procedure and time limit for making claims), except section 42(1A) of that Act, apply in relation to a claim under this section as they apply in relation to a claim for relief.
809BA Claim for remittance basis by long-term UK resident: nomination of foreign income and gains to which section 809G(2) is to apply
(1) This section applies to an individual for a tax year if the individual—
(a) is aged 18 or over in that year, and
(b) has been UK resident in at least 7 of the 9 tax years immediately preceding that year.
(2) A claim under section 809B by the individual for that year must contain a nomination of the income or chargeable gains of the individual for that year to which section 809G(2) is to apply.
(3) The income or chargeable gains nominated must be part (or all) of the individual’s foreign income and gains for that year.
(4) The income and chargeable gains nominated must be such that the relevant tax increase does not exceed £30,000.
(5) “The relevant tax increase” is—
(a) the total amount of income tax and capital gains tax payable by the individual for that year, minus
(b) the total amount of income tax and capital gains tax that would be payable by the individual for that year apart from section 809G(2).
(6) See section 809Z for the meaning of an individual’s foreign income and gains for a tax year.’.

Nicholas Winterton: With this it will be convenient to discuss the following: Government amendments Nos. 340 to 343.
Amendment No. 52, in schedule 7, page 153, line 37, at end insert—
‘(6) Subsection (4) shall not have effect until—
(a) the Treasury has laid before the House of Commons a report setting out its assessment of the impact of the charge on—
(i) foreign nationals in low-paid employment,
(ii) small businesses employing foreign nationals, and
(iii) higher education institutions; and
(b) the report has been approved by resolution of the House of Commons.’.
Government amendments Nos. 344 to 350.

Jane Kennedy: I will speak briefly, as has been my habit, but I will seek to answer any detailed questions on Government amendments Nos. 339 to 343. I draw attention to Government amendments Nos. 339 and 342, which will introduce changes in the Bill to ensure that the £30,000 charge should be creditable under the UK-US double taxation agreement. I was keen to address that concern. I commend the group of amendments to the Committee and am happy to respond in detail to any questions.

Jeremy Browne: Amendment No. 52 is in my name and those of my hon. Friends so I will explain the purpose of it. Before I start, I remember being criticised by Committee members for my absence of drafting skills on Tuesday afternoon. Given the number of Government amendments to the schedule, there are others who need to do their homework in that regard. This part of the Bill is a cautionary tale for the Government about the perils of aping Conservative policy. All kinds of lessons can be learned from looking at these proposals in more detail.
The Institute of Chartered Accountants, among others, was concerned about this proposal. It may not have much of an impact on the so-called super-rich, who will feel that the levy is not too much of a financial burden, but it may have a detrimental impact on other categories of people, particularly those with less money. There may be damaging consequences for some individuals, for certain sections of the economy and for the UK economy as a whole.
Amendment No. 52 would delay the implementation of new section 809G(4), which sets the £30,000 charge for claiming the remittance basis, until the Treasury has produced a report to assess the impact of the charge on three categories. The first is foreign nationals in low-paid employment, a number of whom make contributions in our constituencies in areas with shortages of UK and EU residents willing to undertake certain tasks. The second is small businesses employing foreign nationals. The third is higher education institutions, on which I touched on Tuesday when the Financial Secretary conceded, following an intervention from the hon. Member for Wirral, South, that the Government had not undertaken any appraisal of the impact of these proposals on the UK higher education sector. She anticipated that it would not be a profound impact, but that was not based on a detailed assessment undertaken by the Department. The purpose of amendment No. 52 is to delay the £30,000 charge.

Ben Chapman: May I make the point that my question related to the case made by the Liberal Democrats on the proposal under discussion? It did not relate to the case that had or had not been made by the Government.

Jeremy Browne: I have the highest regard for the hon. Gentleman so I do not wish to imply that he had been disloyal or troublesome as a member of the Committee. He has wisely shown no inclination to do that.
In conclusion, the purpose of amendment No. 52 is to allow greater reflection on the impact of the £30,000 charge on the groups that I mentioned.

Mark Hoban: I should like to raise a couple of questions on the Government amendments. In moving the amendment, the Financial Secretary made a point about ensuring that the £30,000 charge is creditable under the UK-US double taxation treaty. I wonder what happened in the period between the Budget and the Government tabling these amendments. The Treasury commissioned Skadden, a respected US law firm, to comment on the creditability of the charge as set out in the Budget. The conclusion it reached was that in the absence of current guidance by the US treasury or the IRS, the charge would be creditable against United States federal income tax. To be fair to them and to the Minister, there followed various caveats, as lawyers are very good at, but will the Minister set out more clearly, for the benefit of those who pay close interest in these proceedings, who are concerned about creditability, what aspects of the amendment improve the chance of the IRS and the US treasury seeing it as a creditable tax charge?
On the specific amendments, amendment No. 339 puts a cap on the remittance charge at £30,000. The Institute of Chartered Accountants asks what happens if the amount nominated exceeds £30,000, either by error—if an individual has nominated higher gains or income by mistake—or if, when looking at the amounts to be nominated, having originally reached a point of having £30,000, later on perhaps a relief has been changed or amended which means that, because of those tax changes, the gains exceed £30,000.
Amendment No. 342 sets out what happens when an individual nominates less than £30,000 upon income or gains. The amendment treats that individual as if they had nominated £30,000. Would it not have been easier for taxpayers simply to elect to use a remittance basis without having to nominate the gains? The amendment seems to create a situation where, if someone only nominated, say, £1, they would be deemed to have nominated £30,000. I am not sure why the Government have gone down the route of that complicated nomination process when it appears from their amendment that, if someone fails to nominate, it can be deemed that they had nominated £30,000.
Amendment No. 346 makes it clear that only those gains or income that have not been nominated are taken into account when capital, income or gains have been remitted. Would the Minister outline what the consequence will be if the taxpayer remits nominated foreign income or gains?

Jane Kennedy: I invite the hon. Member for Taunton to be a little cautious in representing his party, bearing in mind the comments of his hon. Friend the Member for Twickenham who, as recently as their party’s spring conference in my home city of Liverpool, divided the UK into taxpayers and tax dodgers. I think that their policy is to abolish the remittance basis altogether after a certain period of residence in the UK. Inviting resident non-domiciles to pay up or pack up is not in the interests of UK competitiveness and fails to recognise the major contribution that resident non-domicile individuals make to the UK economy. We have made it clear that we will retain the remittance basis, and the changes we are making are precisely to ensure that the remittance basis remains sustainable in the long run. By making it a more fair and transparent system, we believe that that sustainability is very much improved.
The hon. Member for Taunton also criticises the number of Government amendments that have been tabled. It is clearly a large number, but he did, in the earlier debate, indicate that often we cannot win when we seek to make changes to an original proposal. Draft clauses having been published in January, we then received representations on the detail of the draft, made changes to the draft, and made further changes after further representations. We sought throughout the whole of that process to ensure that we arrive at the right outcome. I believe that we have now done that.
The 12 Government amendments arise from discussions with representative bodies and interested parties since the publication of the Bill. I can assure the Committee that the issues raised by the British-American Business Council will be fed into discussions with the US on the double taxation treaty.
In quick response to the early questions about what has happened since the publication of the legal advice that we had earlier this year, there has been a number of informal discussions between HMRC and the IRS, the American tax authorities, to ensure that what we sought to achieve and the legal advice we had received and published was accurate. Legal advice is often open to interpretation. We did not want to go forward with a set of proposals that might have been interpreted differently by the American authorities. That is why the changes we have made have been brought forward. We will continue to keep an open ear to the concerns that the British-American Business Council may have.

Mark Hoban: We should all be grateful that the Government have had that dialogue with the IRS, and the amendments reflect that. Was there much dialogue between the Treasury and the IRS before the publication of the Finance Bill? These matters could have been raised and discussed at that point, rather than the Government having to come back to table amendments.

Jane Kennedy: There is always informal dialogue between the tax authorities at various levels, particularly when treaties are in operation, as is the case with the United States. There is regular contact to ensure that the treaty is working properly, and to keep the situation under review.
I cannot say what detailed discussions took place between the Treasury and the IRS in the United States before we published the discussion document, but we certainly had discussions to bring us to the point at which we believed our proposals would work for American citizens. It became clear that further work needed to be done to make sure that our understanding was as accurate as possible and did not impact in a negative way on American citizens living and working in the UK.
The hon. Member for Fareham asked a number of questions. Regarding the top-up provision, I have said before that that is a matter of personal choice. The provision applies only if an individual chooses not to nominate sufficient income or gains to give rise to a £30,000 tax charge. If they are concerned about the top-up provision applying to them they can nominate gains in their return.

Mark Hoban: What would be the consequence if they did not nominate sufficient gains?

Jane Kennedy: If they have already remitted all their taxed income and gains they will not be taxed if they remit the nominated income or gains. If they still have unremitted untaxed income and gains, the rules treat them as having remitted the untaxed income and gains before the nominated income and gains.
That may not be the clearest explanation the hon. Gentleman has ever heard, but this is a complex area and I want to be sure that I give the clearest answer possible, rather than cause confusion for those who are listening with interest to our deliberations.
Changing the top-up charge with a deemed nomination as we propose is a direct response to the informal discussions that took place. Nominating income is important to secure creditability and it is important that that is a tax on an actual amount of money, which is why the legislation was drafted to make a nomination of £1, rather than no nomination, and provide a base under which the £30,000 remittance basis charge could be credited.
As I said, the amendments replace the current top-up charge with a deemed nomination. I recognise that the changes are complicated, but the Committee will agree that it is important to ensure that the £30,000 amount is creditable. The main Opposition party and the Government agreed that it was reasonable to introduce such a charge, and if the party of the hon. Member for Fareham had dealt with the details, it, too, would have had to consider those issues. Stakeholders made it clear to us that this was a key issue and we have responded. Government amendments Nos. 349 and 348 make the necessary changes to clarify the fact that the normal time limits and procedures apply both to claims with a remittance basis and to claims of capital gains tax losses by remittance basis users. Finally, the remaining Government amendments make a number of consequential and minor changes in response to the comments that we received. They ensure that the legislation works as intended, and makes things clearer for taxpayers and their advisers. It is likely that we will table further amendments on Report, so we will have an opportunity to look in greater detail at some of these issues. The deeming provision always applies to make the charge £30,000, even if someone does not nominate enough income or gains. If an individual really does not have enough, they should opt out of the remittance basis altogether. As I have repeatedly said, that is a choice that individuals have to make, depending on the details of their personal circumstances.
Amendment No. 52 seeks to delay the implementation of the £30,000 charge. Delaying the implementation would simply prolong the uncertainty in the intervening period, and there would be a cost to the Exchequer of doings so in the region of £300 million. The hon. Member for Taunton did not say anything about how he would find that cost. In introducing this package of changes, I believe we have found the right balance based on the evidence available to us. I urge hon. Members to support the 12 Government amendments, and I hope that the hon. Member for Taunton will withdraw amendment No. 52.

Nicholas Winterton: May I tell the Minister that the hon. Member for Taunton does not have to withdraw amendment No. 52; it is merely included for discussion with this group of amendments.

Amendment agreed to.

Jeremy Browne: I beg to move amendment No. 49, in schedule 7, page 151, line 30, leave out ‘£2,000’ and insert ‘£5,435’.

Nicholas Winterton: With this it will be convenient to discuss the following amendments:
No. 50, in schedule 7, page 151, line 36, leave out ‘£2,000’ and insert ‘£5,435’.
No. 51, in schedule 7, page 152, line 2, at end insert—
‘(4) The Chancellor of the Exchequer shall review, on an annual basis, the amount specified under subsection (1)(c).
(5) Any review conducted under subsection (4) is subject to approval by resolution of the House of Commons.’.
No. 361, in schedule 7, page 152, line 8, at end insert
‘or such income and gains do not exceed the amount referred to in section 809C(1)(c),’.
No. 402, in schedule 7, page 205, line 25, at end insert—

‘Cost of administering domicile regime
144 (1) The Treasury must lay before the House of Commons annually a report setting out the cost of administering the domicile regime.
(2) Each report made under subsection (4) must identify the level of unremitted foreign income and gains at which the revenue raised exceeds both the cost of collection by HMRC and the cost of compliance by the taxpayers.’.

Jeremy Browne: The Committee will doubtless be relieved to know that amendments Nos. 49, 50 and 51 are the last amendments to this year’s Finance Bill tabled by the Liberal Democrats, although we have tabled a couple of important new clauses, which we will consider later in our proceedings.
The purpose of our amendments is to set the de minimis level higher than it is set in the proposed legislation. While it has been increased, the proposal in the Bill is to increase it from £1,000 to £2,000. PricewaterhouseCoopers says that
“it remains too low to exclude many non-doms who, realistically, are not the target of these provisions.”
Amendments Nos. 49 and 50 have the combined effect of altering the £2,000 level so that it reads “£5,435”. That is on the recommendation of the Institute of Chartered Accountants, which suggested a more appropriate de minimis level would be in line with the personal allowance for income tax. That is how we arrived at that rather unrounded figure, which would further ease the compliance burden as well as setting the level at a rate that would be less likely to penalise unfairly workers who have made a contribution to the United Kingdom economy.
In an ideal world, the de minimis level should not be fixed but should be amended, subject to changes in need. That is the intention of amendment No. 51, which would require the Chancellor to undertake an annual review of the level that has been set. I would be interested to know if the Minister would consider such a review, and also if she will engage with the argument to increase the level from the rather limited figure of £2,000 to a figure of £5,435.
I conclude my contribution on this schedule with a quote from PricewaterhouseCoopers on this matter, which goes to the nub of the problem. It said that the amount of the de minimis level
“is unlikely to cover everyday situations such as the rent on the let-out flat back home, or earnings from helping with the family farm in the summer, or a student’s summer vacation job at home. It is the lower paid who will be hit hardest by this and HMRC is not in a position to deal with the practicalities of educating and coping with this community.”
The nub of the problem is that the measure is regarded by observers of politics as one that was introduced to recoup money from extremely rich people who choose to earn large amounts of money in this country. The stereotypical picture that is painted is of an extremely rich banker in the City who is not making a large contribution to our tax base. However, many more people are affected by the measure. The intention of the amendments is to try to ensure that those people are not unfairly snared in the system and penalised.

Stewart Hosie: Can the hon. Gentleman confirm that the measure applies to people who have chosen not to use the remittance basis, rather than to those who have chosen to use it, and that the numbers involved are not just the 120,000 or 130,000 wealthy non-doms who are normally spoken about but perhaps up to 5 million other people who fall into that category, one way or another?

Jeremy Browne: Yes is the short answer to that question. We could have a debate about the figure of 5 million that the hon. Gentleman mentioned, because I understand that that is an estimate or a prediction of the maximum number of people involved. However, his comment was helpful, because he expanded on the point that I was seeking to make, which is that these measures are often regarded by the wider commentating classes and the population as a whole as being mainly concerned with the tax affairs of people who are relatively wealthy, but there are large numbers of people working in the United Kingdom and remitting money who are not very wealthy. Indeed, they are on the lower end of the income scale, and they contribute to our economy by doing work that people in this country do not have the skills or, more likely still, the inclination to do themselves.
We are therefore talking about a category of people to whom we would not wish to do anything other than encourage regarding the contribution that they make to our economy. The proposal in amendments Nos. 49 and 50 seeks to ease the burden on those people in a way that is more equitable than the arrangements envisaged by the Government in the Bill.

Mark Hoban: I want to talk principally to amendments Nos. 402 and 361, which are in my name and those of my hon. Friends. I would also like to use this debate as an opportunity to discuss further the issue that the hon. Member for Taunton has mentioned, which is the treatment of large numbers of people who are going to be subject to these rules. He is right to say that much of the debate has focused on relatively wealthy individuals, but a large number of people have raised concerns about people on much lower incomes who will fall within the remit of the changes.
As I understand it, the de minimis limit that the Government have introduced is designed to take people at low levels of foreign income and gains out of the tax system, and to help lift the burden of compliance on taxpayers and HMRC. The Minister said in the previous debate that people will have to make a choice, and that they will need to make a decision and do some calculations as to whether the rules apply. We are asking taxpayers to make a decision: should they claim the remittance basis and lose the personal allowances, or should they be taxed on an arising basis, then seek to offset foreign tax against UK tax?
Those calculations will be made not just by high net worth individuals who have access to expensive accountants and lawyers. They will have to be made by migrant workers, seasonal workers who come into the UK to pick fruit and help in the agriculture industry, people from overseas working in the NHS, skilled migrants entering through Home Office programmes, international students—we spoke about them earlier—and even Commonwealth citizens serving in the armed forces. The Low Incomes Tax Reform Group has highlighted the range of people who may be caught by the measure.
It is worth bearing in mind some of the comments that have been made about the issue. John Whiting, who was cited earlier, said in evidence to the House of Lords Economic Affairs Committee:
“It is of great concern that we have here a provision that will affect a considerable number of the vast majority of non-domiciles who are not only unaware of the term ‘non-domicile’ in many cases...but because of the situation back home...because of the work they do back home, or their summer job back home, or the rent on their flat, are suddenly losing their personal allowances...It seems unfair, at best, and, actually, totally impractical”.
I shall raise some questions about that later. That view is shared by several people who gave evidence and made representations to us.
The Low Incomes Tax Reform Group suggested that HMRC needs to make sure, before people set foot in this country, that they understand remittances and how the relevant double tax treaty works. It will be necessary for them to consult agreements in the years of arrival and departure—every year for seasonal workers who have a pattern of being in two countries on a regular basis—to establish, for the purposes of the double tax treaty, in which country they are resident. Once they have established that, they will be able to determine which country has the primary right to tax.
People also need to think about how tax credit relief claims can be made; about withholding taxes that may have been levied on earnings and bank interest; and about how those taxes will be credited under the UK system. There are quite a few complex issues that migrant workers need to understand to make the choice that the Minister mentioned earlier. There are other issues, too. What about income that arises in the tax year of arrival, before the individual becomes resident? There are some issues concerning split years. In the past, extra-statutory concession A11 looked at how income could be treated in a split year, and whether it was feasible for income earned before someone became resident in the UK should be disregarded for UK tax. Can the Minister indicate whether she has given any thought to the situation of someone who becomes resident in the middle of the year? Is the foreign income that they earned before they arrived in the UK disregarded? That would certainly make the regime easier to use, but, as a consequence of the Wilkinson judgment—we had a debate about it on Tuesday—I am not sure whether A11 will still apply. Clearly, that is important in trying to ensure that there is a workable regime for migrants.
One of the examples deals with capital gains tax and the position for temporary visitors who keep their home abroad, and how that applies to migrant workers. There are some significant issues and if there are issues for migrant workers themselves, there will be issues for the administration of the system by HMRC. Malcolm Gammie from the Institute for Fiscal Studies put it this way:
“Precisely how it will be possible actually to administer that exemption and how Her Majesty’s Revenue and Customs will actually be able to check whether people are doing this correctly is, I think, one of the more significant questions which arises from an administrative perspective in relation to these arrangements”.
Francesca Lagerberg from the Institute of Chartered Accountants wondered how
“from a resource perspective, HMRC are going to police whether that £2,000 de minimis is being properly operated and that is a big ask ... do they have the resources to do that, the training to do it and the understanding of the issues around it? It is a massive undertaking. We were very concerned about the compliance, the admin work placed upon HMRC and upon the taxpayer that that particular de minimis will bring”.
HMRC is very confident that it will be able to deal with this. David Richardson from HMRC said:
“In reality it is quite simple for most people... Although some choose to present it as complicated”.
Indeed, the Minister’s response might be that those people who are raising issues about de minimis are making it far more complicated than it is, but that slightly complacent answer underplays the full extent of the problem. The Minister last week referred to a bank balance of about £1.6 million. We are talking about people who are earning some money while they are back home in the country where they are domiciled. They are migrant workers who will perhaps spend time in the UK working and will then return home.
There are some issues about the cost of compliance both for HMRC and for the people who are subject to this regime—individuals who are non-domiciled in the UK, but are resident here. That is where amendment No. 402 comes into play. The objective is to understand the point at which it is worth introducing this regime, and where the de minimis limit should be set by reference to the cost of compliance to the taxpayer and HMRC. There is no point trying to collect revenue if the cost of collection exceeds the revenue that will be collected. That is a better approach to looking at the impact of the de minimis limit than setting an arbitrary figure in the Bill. We need to understand exactly what the Government expect the costs of compliance will be for both the tax payer and HMRC.
Amendment No. 361 would amend a change that the Government have made: where there is a spouse or a child under the age of 18 they are not required to pay the £30,000 charge. Under amendment No. 361, rather than having no income, the income that they would earn would be below the de minimis limit. A spouse may have a bank account that earns some interest. Rather than catching relatively small amounts, the de minimis limit would apply in that case.
I should like to make one further comment about the interaction of these arrangements with the tax treaties. I touched on this briefly on Tuesday when I intervened on the Minister to ask which took precedence: double tax treaty rules or these rules. There are some issues around the number of years that might be treated as resident. The question arises as to what years should be counted for the purpose of the test, where a taxpayer may be resident in the UK under UK law but is also resident in another country. If, under the double tax treaty, the taxpayer is treated as not being resident in the UK for a particular year, does that mean that they are not resident in the UK for the purpose of the seven-out-of-nine-years rule?
It is usual for a double tax treaty to contain clauses to determine residency. Often, there is a tie-breaker clause where the general tax laws would result in an individual’s being a dual resident. In cases of difficulty, it is usual for the two countries to decide the question by mutual agreement. For example, the US-UK tax treaty has that facility at the moment. It would be helpful if the Minister expanded a little bit—certainly in respect of migrant workers—on how the double tax treaties will work, how applicable they are and the extent to which they override the existing rules. I understand that some double tax treaties deal with split-year arrival or departure, but in other situations that may not apply. That refers back to the point about extra-statutory concession A11.

Mark Field: I shall be brief, as it is not an appropriate time to have a full debate on all aspects of the proposal for non-domicile tax. I have always been sympathetic towards elements of such a tax, but there is grave concern about the lack of certainty in this area.
I accept that, as the Minister said, these are often quite complicated matters. The concern is not necessarily whether that lack of certainty is justified—professionally qualified people probably can work their way through a mesh of different regulations. However, such a perception could do grave damage to this country as an open and welcoming one in a global world. I accept that that is by no means the single most important consideration. None the less, in the City of London there is a worry that we could run the risk of losing some talented people, who will go to Singapore, Dubai or other parts of the world rather than settling on these shores.
With reference to the amendments, I have a lot of sympathy with the idea of having a larger de minimis provision. Otherwise, we run the risk, as my hon. Friend the Member for Fareham said, of encountering two problems. First, there is the sheer cost of compliance, which will be every bit as much a cost to HMRC as it will be to the taxpayers concerned. Secondly, above all, that makes this a potentially inefficient tax, which should not go unremarked on by Opposition Members. I am interested to hear the Minister’s response.
Recalling elements of an earlier debate, a particular problem that we are facing is not so much that relatively low-paid people are coming to work in this country as immigrants and taking the jobs of our indigenous population, but that the disincentive to work is often so great, particularly because of social housing and the tenure that comes with it—and all the housing benefit that goes with that—that we run a real risk of unintended consequences arising from what is emerging in a lot of legislation.
I hope that the Minister will reassure us that she is giving some thought to these matters. Without a reasonable de minimis provision, we run the risk of pulling many more people into the provisions covering these remittances, in a way that the Government probably do not intend.

Jane Kennedy: We must consider what de minimis should be applied to the remittance basis, alongside our decision that it is not fair that a taxpayer should have access to both their personal allowances, if they pay tax on the arising basis, and an allowance when they are using the remittance basis.
Amendments Nos. 50 and 51 together seek to raise the limit on the unremitted overseas income beyond which individuals lose access to their UK personal allowances and instead face the £30,000 remittance-basis charge. The Opposition amendments are unnecessary. We have increased the limit beyond which a remittance-basis user pays the charge. Our original proposal was £1,000. In direct response to the representations that we received, we felt it was reasonable to double that, in effect, to £2,000.
The hon. Members for Taunton and for Fareham are concerned about whether that is in the interest of low-income migrant workers. I reassure the Committee that low-income migrant workers who have more than £2,000 of unremitted foreign income and gains for the year are unlikely to pay more tax as a result of the new rules on the remittance basis. It is worth remembering that to earn £2,000 of interest on a foreign bank account would require about £40,000 of capital invested in that income at an interest rate of about 5 per cent. I think hon. Members will agree that that is a substantial sum of money.

Greg Hands: It strikes me that a migrant worker could well have £40,000 in a bank account. About 6 per cent. of my constituency is Polish, and many of those people are saving back home to build a house or some other kind of property. It seems to me not impossible that £40,000 could be a realistic sum to have in a bank account.

Jane Kennedy: We need to keep clearly in mind that the de minimis limit we are discussing does not refer to income in the UK. It refers to the income that the worker leaves offshore. I know the hon. Gentleman understands that, but I do not think it is always fully understood.
I shall deal in more detail about the work being undertaken to ensure that the greatest possible clarity and assistance is given to those who may be concerned about the impact of the proposal. It is important to remember that individuals have a choice about paying tax using the arising basis. There are a number of decision points, depending upon individual circumstances, when it may be in the individual’s interest to be in one place or the other.
All the advice I have received leads me to conclude that the majority of migrant workers with modest earnings will be better off using the arising basis, as they will be able to claim relief from foreign tax paid. HMRC will provide additional targeted help and guidance for this group of taxpayers. A limit set at the level of the personal allowance as proposed by the amendments would cost us around £40 million a year.

Mark Hoban: The Minister suggested that it may be beneficial for migrant workers to be taxed on an arising basis, and talked about the work that HMRC will do to ensure that they are aware of these issues. Does that mean, for example, that HMRC is going to produce easily comprehensible guides to double tax treaties?

Jane Kennedy: I will come to that in a moment, but I want to address one or two other points that have been raised. The hon. Member for Dundee, East, who is temporarily not in his seat, asked whether people not claiming the remittance basis would be affected by the de minimis limit. This is an example of the misunderstandings that exist, which it is helpful for me to clarify.
Such individuals would not be affected by the de minimis. They would be opting for the arising basis of tax, and therefore would not be affected. Following from that, there are many decisions for people to make. The legislation works by applying the arising basis automatically. Resident non-domiciles, and migrant workers in particular, would have to claim the remittance basis. If people do not claim, there is no complexity and they are on the same tax basis as the vast majority of UK citizens. The vast majority of low-income migrant workers are either under the £2,000 limit, or better off on an arising basis.
The hon. Member for Hammersmith and Fulham talked about the Polish workers living and working in his constituency. I, too, have significant numbers in my constituency, and they make a great contribution to Liverpool. Is it not fairer that someone with that much offshore income back in their home country should make a contribution, when other UK residents are taxed on income well below that level?
Questions have been asked about HMRC’s ability to cope. Although the new rules will apply from 6 April this year, it is important to remember that individuals will not need to make a claim to the remittance basis for this tax year until after April 2009 at the earliest, and the first filing date for paper returns will not be until 31 October 2009. There is time, therefore, to put in place new procedures and resource, as needed, to ensure that HMRC administers the new rules effectively.
HMRC is updating all the guidance on residence and domicile, and there will be several layers of guidance including material aimed at providing simple, non-technical explanations of the concepts and rules. HMRC will consult stakeholders on the guidance—my officials met the Low Incomes Tax Reform Group yesterday to take forward work on the guidance. We are aware of the concerns, and are working hard to address them.
The hon. Member for Fareham asked whether the extra-statutory concession A11 would apply. In our brief discussion of extra-statutory concessions yesterday, I indicated that a great deal of work going on. The concession will continue to apply, but if we are to consider a statutory residence test, it would be appropriate that such discussions take account of the extra-statutory concession A11, as we will want to consider any split-year treatment as part of that dialogue.

Mark Hoban: Will the Minister confirm, therefore, that for somebody who comes to the UK part-way through the tax year, their earnings in their normal place of domicile will not be counted towards the £2,000 de minimis limit, as the extra-statutory concession A11 will continue to apply until the statutory residence test?

Jane Kennedy: I can confirm that if the extra-statutory concession applies to such an individual now, it will continue to apply.
HMRC will rely on a range of approaches to avoid the problems of compliance described this morning. Its guidance will help people to make the right choices, and it would not be sensible for HMRC to seek to enforce the collection of small amounts of tax. That would not be economical—for example, it will not spend £500 to collect £100.

Mark Hoban: As I understand it, the default position will be that people will be taxed on an arising basis. How will HMRC work out whether that basis is appropriate and that people are complying with the rules? Somebody might be taxed on their earnings in the UK on an arising basis and claims for personal allowances, but might not have declared, for example, that they are earning £3,000 in rent on their flat in Warsaw. How will HMRC identify those facts and ensure proper compliance?

Jane Kennedy: With regard to amendment No. 402, HMRC is required to administer all taxes efficiently and in the least burdensome way possible, and that already includes the sort of cost-to-yield ratio calculation that we have just been discussing. I do not see a case for separating out, as proposed in the amendment, as part of the tax system for those already being reported on, and we do not believe that there will be an increase in the administrative cost of the remittance basis as a result of implementing the reforms. As I said, HMRC will provide support and guidance for migrant workers and other low-income groups, and we are working with key stakeholders to ensure that that is targeted appropriately.
The hon. Gentleman will know that individuals will be required to self-assess. HMRC will not increase its surveillance or policing of resident non-domiciled communities. The system will be based on the normal procedures of individuals being required to self-assess their liability to pay tax.
Amendment No. 49 would mean that the level of the limit was reviewed annually. Again, that is unnecessary. The Committee will recognise that any future increase in the level of the limit would be enacted in a Finance Bill and would be subject to discussion and debate at that time.
Amendment No. 361 would exempt someone from having to make a claim for the remittance basis if they have less than £2,000 income or gains arising in the UK.

Jeremy Browne: Would not it be helpful if, between Budgets, the Chancellor had come to the House to raise the personal allowance owing to an error in a previous Budget? Should not there be some scope in the legislation to allow adjustments to be made in such circumstances?

Jane Kennedy: The short answer is no.
On amendment No. 361, people with no income or gains are permitted to access the remittance basis without a claim, as I said. Introducing an exemption for £2,000 could create tax avoidance possibilities. Individuals have a choice between keeping their personal allowance or claiming the remittance basis. The amendment would give people a £2,000 personal allowance with the remittance basis, which would disturb the balance of fairness that we have sought to achieve.
On double taxation treaties, it depends on the individual’s circumstances, their home country and the nature of the tax treaty with that country. Unless there is a specific example that might illuminate that and to which I could respond on Report, having considered it, I cannot give much more than that general response. It will depend on the circumstances of a particular individual and the terms of the relevant tax treaty. I have answered most of the points that have been raised, but I am sure that we will return to some of these issues.

Jeremy Browne: The number of amendments to the schedule that have been tabled indicates the confusion in the Government’s mind about this whole area of taxation. I agree with the view that has been expressed by others, including the hon. Member for Cities of London and Westminster, that there are practical issues relating to implementation and information to employers and employees about the consequences of the arrangements and the potential revenue implications. Different people have different ideas about what is “fair”, but several members of the Committee have expressed concerns about the impact of the proposals on people with low and low-to-middling incomes who are making a contribution to our economy.
There is only so much that we can do in Committee to save the Government from themselves, and I am content to have made those opinions available to the Minister. She is, of course, within her rights to ignore them and suffer the consequences later. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nicholas Winterton: Order. I feel bound to tell the Committee that there are 10 minutes before we break, and when we reassemble at 1 o’clock we have three hours. We have a further 10 major debates on schedule 7, and then we will discus new clauses. I suggest that hon. Members bear that in mind when they are speaking and when deciding whether it is appropriate to intervene.

Amendment made: No. 340, in schedule 7, page 152, leave out lines 1 and 2.—[Jane Kennedy.]

Mark Hoban: I beg to move amendment No. 362, in schedule 7, page 153, leave out lines 1 to 12.
I shall be mindful of your strictures about brevity, Sir Nicholas—

Jane Kennedy: Hear, hear.

Mark Hoban: I said “mindful”.
There is a point of disagreement between us and the Government. The Government decided that, as part of their rules for the taxation of resident non-domiciles, they would no longer benefit from personal allowances. That cropped up in the previous debate. Our point is that people with relatively modest overseas income could end up paying tax on all their income, without the benefit of any personal allowances. Furthermore, because of the way in which the provision is structured, they might also lose their annual exempt amount under capital gains tax. That could lead to them being taxed on relatively small gains if they have already used their de minimis limit of £2,000.
There will also be an issue for companies. The Minister said that people will, by default, be taxed on an arising basis and will be able make their claim for remittance basis when the tax year has ended, but clearly employers will assume that people qualify for personal allowances and will tax them on that basis, so either the individual will have to repay the benefit from that tax allowance, or part of the way through the yea they will elect the remittance basis and advise their employer appropriately.
A compliance cost for business will arise from the loss of personal allowance and people’s decision about that. That will add to the burden on companies. The Association of Labour Providers, a body that has not previously been cited during our proceedings, has highlighted some of the challenges that will arise when people move between the UK and other territories. It pointed out that 52 per cent. of registrants under the Department for Work and Pensions scheme were in temporary employment, and 57 per cent. said that they intended to stay for less than three months, while only 12 per cent. said that they intended to stay for more than a year.
That demonstrates some of the challenges for migrant workers in complying and for employers in, for example, providing advice on whether workers should be taxed on a remittance basis or retain their personal allowances and be taxed on an arising basis. We discussed those points during previous debates, and I shall not reiterate them. To make it easier for those individuals, it may be better to reinstate the personal allowances and to lift the burden rather than changing the de minimise limit, as was proposed in the previous group of amendments.
Another issue goes back to double taxation treaties. John Whiting suggested that although these rules withdraw personal allowances, they may have to be reinstated under some double taxation treaties, which again adds to the confusion and complexity that taxpayers will have to navigate. It would be helpful if the Minister would indicate whether taxation treaties will be able to override the withdrawal of personal allowances. If so, it might be easier for the Government to return to personal allowances.
My final point is about capital gains tax. The Government’s proposals not only exclude the personal allowance, but take away the annual exempt allowance. In terms of the compliance burden on HMRC, the current reporting requirements for CGT are linked to the annual exempt allowance. If the annual exempt allowance for resident non-domiciles is removed, they will need to report any gains that they make. That will lead to a disproportionate increase in the administrative burden on both HMRC and the taxpayer.
I note the Minister’s comments in the last debate about HMRC not pursuing relatively small amounts of tax, but in theory a taxpayer would be required to report a relatively small gain—a gain as small as £5—on overseas property, for example. They would need to complete all the CGT pages of the tax return and would potentially pay CGT of 90p on a £5 gain. By wiping away the annual exempt allowance, we are in danger of increasing the burden on the taxpayer, requiring them to submit more forms than strictly necessary to comply with the rules. That is the impact of the abolition of personal allowances, and I am grateful for the Minister’s comments on both the personal allowance and the withdrawal of the annual exempt allowance.

Jane Kennedy: We have been clear from the outset that it is unfair for a remittance basis user to continue to have the double benefit of the remittance basis and UK personal allowances. We have responded to concerns that remittance basis users with small amounts of overseas income or gains would be adversely affected by the loss of the personal allowances, by raising the limit above which a remittance basis user would lose that personal allowance from £1,000 to £2,000 of unremitted overseas income and gains. Above that level, people who do not want to lose their personal allowances can choose to be taxed on the arising basis like the majority of UK taxpayers. We believe that that strikes the right balance. We do not believe that it will be an extra burden on employers, because it will all be done through self-assessment.
I note the hon. Gentleman’s point that some employers may have concerns for their employees, and I will give the matter some thought. However, I do not believe that it will be a burden for employers. It is technically possible for a small number of our double taxation treaties to prevent the removal of the personal allowances when an individual claims the remittance basis. In practice, however, the circumstances would be very unusual. The individual would have to be treated as resident in both the UK and another country during the year, the double taxation agreement would have to treat them as treaty resident in the other country, and they would have to have certain sorts of investments in order to make it worth their while to claim the remittance basis. As a result, we anticipate that the number of people to whom this applies will be tiny. Those who do benefit will still be liable for the £30,000 charge.

Mark Hoban: Are any of those potentially troublesome treaties ones which the UK has with A8 states?

Jane Kennedy: There are 16 double taxation agreements. If it would be helpful to the Committee, I will establish which countries those 16 apply to and return with that information after our break.
Individuals have a choice. If they want to claim the remittance basis, they will lose their personal allowances and the annual exempt amount. No one will be forced to claim the remittance basis. Individuals need to make a decision on whether or not to claim, based on their own circumstances.

It being twenty-five minutes past Ten o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at One o’clock.